Millions of eligible taxpayers fail to take earned income credit

Published: Tuesday, February 12, 2008

EILEEN PUTMAN

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WASHINGTON - The IRS is making a big push this year to make sure certain taxpayers know they can take the earned income tax credit, a benefit for lower income workers and working families that goes unclaimed by up to 25 percent of those who are eligible.

The EITC is intended to offset a portion of Social Security and Medicare taxes, thus boosting take-home income in low-wage jobs and providing an incentive to work. It's a "refundable" credit, meaning that after it is figured against your tax liability, the IRS sends you any money you're due.

For 2007 tax returns, the maximum credit is worth up to $4,716 for people with two or more qualifying children, though it's also available to some taxpayers without children.

"For families eligible for the maximum it's almost a quarter of their income," said David R. Williams, IRS director of Electronic Tax Administration and Refundable Credits. "That is such a significant amount of money. It can mean so much for a family."

But the rules and qualifications can be confusing. People overlook the credit because they believe it's too complicated, they don't have children or their income is so low they don't have a legal obligation to file taxes. Many aren't native English speakers.

As many as 5 million people are probably eligible for the credit but are not taking it, the IRS says.

To reach out to them, the IRS has "EITC Awareness Day" on Jan. 31 - about the time people get their W-2 forms from employers and start thinking about income taxes. The agency also works with 12,000 volunteer tax preparation sites for people who need help with this and other benefits.

The credit is calculated on IRS worksheets, available in English and Spanish. There is also an English-Spanish "EITC Assistant" tool on the IRS Web site at http://www.irs.gov. Many EITC filers can file for free online using the IRS Free File partners, providing they access those partners from the IRS Web site. The agency is also reaching out to Native Americans, people with disabilities and those in rural areas who may be eligible for the credit.

Congress originally approved the tax credit legislation in 1975. For tax year 2005, more than 22 million taxpayers received over $41 billion through the EITC credit, an average credit of $1,797, the IRS said. For tax year 2006, 22.4 million taxpayers received $43.7 billion as of last November. But only about 75 percent of those eligible claim this benefit, the agency says.

Most who claim the credit use a paid tax preparer. The IRS says taxpayers should avoid preparers who offer upfront to qualify them for EITC or ask them to sign a blank 1040. They should also avoid preparers who charge high fees for refund anticipation loans, a short-term advance of quick cash using the expected refund as collateral. Those who can't afford a paid preparer should use volunteer tax prep sites run by community organizations, the IRS says.

To get the earned income tax credit, you must file a tax return, even if you didn't earn enough money to be obligated to file.

If in 2007 you had less than $37,783 ($39,783 for married filing jointly) in income and had two or more qualifying children, you are eligible for the credit. People with no qualifying child can still be eligible for a credit of up to $428 if their income was less than $12,590 ($14,590 for joint filers). Those with one qualifying child and income under $33,241 ($35,241 for joint filers) are also eligible.

What's a qualifying child? There are three tests: the child's relationship to you, age and residency. A qualifying child can be a son, daughter, stepchild, foster or adopted child, or descendant of any of them; brother, sister, half brother or sister, stepbrother, stepsister or their descendant. The child must have been younger than 19 at the end of 2007 or a full-time student younger than age 24. Someone permanently and totally disabled also qualifies, regardless of age. The child must have lived with you in the United States for more than half the year.

People claiming the EITC, and their qualifying children, must have valid Social Security numbers.

It's possible some of those eligible for the credit don't claim it because they have illegal immigrants in the household and fear the IRS will share their information with immigration authorities. The IRS says it doesn't do that.

"We divulge that information to no one," Williams said. "We would not be divulging Social Security numbers or taxpayer identification numbers to other third parties."

Another reason people may hold back from filing for the credit is fear that the refundable money may adversely affect welfare benefits. But in most cases, EITC payments are not used to determine eligibility for Medicaid, Supplemental Security Income, food stamps, low-income housing or most Temporary Assistance for Needy Families payments.